TurboTax complaining about traditional IRA basis

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Topic Author
deanmoriarty
Posts: 546
Joined: Tue Jan 28, 2014 12:19 am

TurboTax complaining about traditional IRA basis

Post by deanmoriarty »

Hello,

By 2020 I had $23,000 of nondeductible contributions in a traditional IRA. I never did the backdoor Roth in the prior years because I had a sizable SIMPLE IRA that messed with the pro-rata rule, which I finally rolled over into a 401k plan in 2020 (the SIMPLE IRA). By the time I managed to do the conversion (of the traditional IRA), it was in the middle of the 2020 downturn and so the amount in the IRA account was not $23,000 but ~$18,000, which I fully converted.

This led to a 2020 form 8606 containing the following:

Line 1: nondeductible contributions for 2020: $6,000
Line 2: total basis in traditional IRA: $17,000
Line 3: sum 1 and 2: $23,000
Line 13: nontaxable portion of all your distributions: ~$18,000
Line 14: your total basis in traditional IRAs for 2020 and earlier years: ~$5,000

In 2021 I then did a standard $6,000 nondeductible traditional IRA contribution followed by Roth conversion, and I just received my Vanguard 1099R, which I was trying to put into TurboTax.

At the question "Any nondeductible contributions to your IRA from 2020 or prior years (this is not common)?", I answer yes and in the input box "Total basis as of December 31, 2020" I put ~$5,000 (from line 14). At this point, Turbotax complains and says: "The IRA basis you entered is different from the basis we transferred from 2020 ($0). You will need to prepare an explanation to the IRS".

This is silly, I did the migration from the TurboTax 2020 .tax file which clearly shows the ~$5,000 total basis at line 14, so I am wondering if I am missing something here due to the fact that the cost basis is not a "real one" anymore since the IRA has a balance of $0?

I never had this problem. Last year the software didn't have any issues automatically migrating my $17,000 cost basis from 2019 into my 2020 return, and same for all the prior years, I never had to go dig numbers from my old returns. I started a brand new TurboTax return (always by migrating from the 2020 tax file), and I still get the same carried-over basis of $0, so it's either a bug or me not understanding these new circumstances.

Thanks
sycamore
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Re: TurboTax complaining about traditional IRA basis

Post by sycamore »

deanmoriarty wrote: Mon Jan 17, 2022 11:48 am ... By the time I managed to do the conversion (of the traditional IRA), it was in the middle of the 2020 downturn and so the amount in the IRA account was not $23,000 but ~$18,000, which I fully converted.

...
In 2021 I then did a standard $6,000 nondeductible traditional IRA contribution followed by Roth conversion, and I just received my Vanguard 1099R, which I was trying to put into TurboTax.

At the question "Any nondeductible contributions to your IRA from 2020 or prior years (this is not common)?", I answer yes ...
Maybe I misunderstand but does "I fully converted" mean that your Traditional IRAs were completely empty/converted by the end of 2020?

If so, seems like you should answer "no" to the question "Any nondeductible contributions to your IRA from 2020 or prior years" because you no longer had nondeductible contributions once you did the conversion. That's just a guess, I really have no idea but I'm following along in case I need to understand the situation (I'm doing tax volunteer work this season)
Topic Author
deanmoriarty
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Re: TurboTax complaining about traditional IRA basis

Post by deanmoriarty »

sycamore wrote: Mon Jan 17, 2022 1:35 pm
Maybe I misunderstand but does "I fully converted" mean that your Traditional IRAs were completely empty/converted by the end of 2020?

If so, seems like you should answer "no" to the question "Any nondeductible contributions to your IRA from 2020 or prior years" because you no longer had nondeductible contributions once you did the conversion. That's just a guess, I really have no idea but I'm following along in case I need to understand the situation (I'm doing tax volunteer work this season)
Thank you for your reply. Yes, my traditional IRA account was completely $0 after the conversion. That still doesn’t change the fact that the 2020 8606 form has ~$5,000 on line 14, even though the traditional IRA was already at $0 by the end of 2020.
cas
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Re: TurboTax complaining about traditional IRA basis

Post by cas »

This question gets debated periodically.

I'm not involved, except that I remember that the question gets debated periodically and the the word "poof" (as in "basis goes poof") often occurs in the discussion.

If you enter "8606 poof" in the search box at the top of this page, you'll probably find relevant reading (but probably not "an answer"), e.g. this thread.
Topic Author
deanmoriarty
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Re: TurboTax complaining about traditional IRA basis

Post by deanmoriarty »

cas wrote: Mon Jan 17, 2022 1:59 pm This question gets debated periodically.

I'm not involved, except that I remember that the question gets debated periodically and the the word "poof" (as in "basis goes poof") often occurs in the discussion.

If you enter "8606 poof" in the search box at the top of this page, you'll probably find relevant reading (but probably not "an answer"), e.g. this thread.
Thanks. The thread is indeed confusing and there doesn’t seem a clear indication of what is the correct way of handling this.

I’m trying to understand what it means to “accept” TurboTax calculations and lose that cost basis. In what way could I have taken advantage of it? I don’t see myself in the future ever doing a back door roth conversion that triggers that much gains, so it might be a moot point, as long as both ways are legal and I don’t get audited for not having “carried forward” the numbers listed on the previous year 8606.
MrJedi
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Re: TurboTax complaining about traditional IRA basis

Post by MrJedi »

If you ever roll the 401k back out to a traditional IRA, you could potentially take a distribution against that "lost" basis, lowering the taxable amounts of the distribution. It may or may not be worth the hassle to you to remember this when you do retire and take distributions.

Maybe you could do something clever like a partial rollover from the 401k into the traditional IRA (just enough to cover the basis) and then do a Roth conversion of that as non taxable basis.
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retiredjg
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Re: TurboTax complaining about traditional IRA basis

Post by retiredjg »

Was the 2020 Form 8606 done by TurboTax or by hand?

It has been reported here that some software will calculate line 14 to be $0 (if the IRA balance is $0) even though the same form done by hand will show the $5k basis left over.

If TT did your form last year, it sounds like it shows $5k on line 14 for 2020 but enters $0 on line 2 for 2021. Is that exactly what happened?

f so, you really have not lost anything other than some free money offered by a loophole that is seen when doing the form by hand.

Your old IRA was fully converted (regardless of the basis) and your new non-deductible contribution will also be converted tax free just like it would have been if that $5k basis had not been left on line 14 in 2020.

One fix for this, and I'm not at all sure it would work, is to file a paper return with a paper Form 8606 done by hand which will push your basis forward. You will have to do this every year until you have contribution growth to consume the entire phantom basis.

I suppose an alternate fix is to force the $5k number onto line 2 and see if it works.

The safest fix for this is to just to let TT put $0 on line 2 and move on. Like I said, you have not lost anything if you do that.
Topic Author
deanmoriarty
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Re: TurboTax complaining about traditional IRA basis

Post by deanmoriarty »

retiredjg wrote: Mon Jan 17, 2022 3:48 pm Was the 2020 Form 8606 done by TurboTax or by hand?
By TurboTax, TurboTax listed the ~$5k on line 14.
retiredjg wrote: Mon Jan 17, 2022 3:48 pm If TT did your form last year, it sounds like it shows $5k on line 14 for 2020 but enters $0 on line 2 for 2021. Is that exactly what happened?
Correct.
retiredjg wrote: Mon Jan 17, 2022 3:48 pm f so, you really have not lost anything other than some free money offered by a loophole that is seen when doing the form by hand.

Your old IRA was fully converted (regardless of the basis) and your new non-deductible contribution will also be converted tax free just like it would have been if that $5k basis had not been left on line 14 in 2020.

One fix for this, and I'm not at all sure it would work, is to file a paper return with a paper Form 8606 done by hand which will push your basis forward. You will have to do this every year until you have contribution growth to consume the entire phantom basis.

I suppose an alternate fix is to force the $5k number onto line 2 and see if it works.

The safest fix for this is to just to let TT put $0 on line 2 and move on. Like I said, you have not lost anything if you do that.
Thanks for the explanation, it makes me feel better and I will likely proceed in accepting TurboTax's $0 and move on with my life.
investlikebogle
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Re: TurboTax complaining about traditional IRA basis

Post by investlikebogle »

deanmoriarty wrote: Mon Jan 17, 2022 11:48 am Hello,

By 2020 I had $23,000 of nondeductible contributions in a traditional IRA. I never did the backdoor Roth in the prior years because I had a sizable SIMPLE IRA that messed with the pro-rata rule, which I finally rolled over into a 401k plan in 2020 (the SIMPLE IRA). By the time I managed to do the conversion (of the traditional IRA), it was in the middle of the 2020 downturn and so the amount in the IRA account was not $23,000 but ~$18,000, which I fully converted.

This led to a 2020 form 8606 containing the following:

Line 1: nondeductible contributions for 2020: $6,000
Line 2: total basis in traditional IRA: $17,000
Line 3: sum 1 and 2: $23,000
Line 13: nontaxable portion of all your distributions: ~$18,000
Line 14: your total basis in traditional IRAs for 2020 and earlier years: ~$5,000

In 2021 I then did a standard $6,000 nondeductible traditional IRA contribution followed by Roth conversion, and I just received my Vanguard 1099R, which I was trying to put into TurboTax.

At the question "Any nondeductible contributions to your IRA from 2020 or prior years (this is not common)?", I answer yes and in the input box "Total basis as of December 31, 2020" I put ~$5,000 (from line 14). At this point, Turbotax complains and says: "The IRA basis you entered is different from the basis we transferred from 2020 ($0). You will need to prepare an explanation to the IRS".

This is silly, I did the migration from the TurboTax 2020 .tax file which clearly shows the ~$5,000 total basis at line 14, so I am wondering if I am missing something here due to the fact that the cost basis is not a "real one" anymore since the IRA has a balance of $0?

I never had this problem. Last year the software didn't have any issues automatically migrating my $17,000 cost basis from 2019 into my 2020 return, and same for all the prior years, I never had to go dig numbers from my old returns. I started a brand new TurboTax return (always by migrating from the 2020 tax file), and I still get the same carried-over basis of $0, so it's either a bug or me not understanding these new circumstances.

Thanks
I have exactly the same situation. I haven’t filled my forms yet.

I think TurboTax should automatically take prior remaining basis and put in on line 2 on form 8606. In line 1, you would have 2021 non deductible contributions of 6000.

Not sure but if asks for remaining ira balance, enter 0.01 instead of zero and try again.
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retiredjg
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Re: TurboTax complaining about traditional IRA basis

Post by retiredjg »

deanmoriarty wrote: Mon Jan 17, 2022 4:01 pm
retiredjg wrote: Mon Jan 17, 2022 3:48 pm Was the 2020 Form 8606 done by TurboTax or by hand?
By TurboTax, TurboTax listed the ~$5k on line 14.
retiredjg wrote: Mon Jan 17, 2022 3:48 pm If TT did your form last year, it sounds like it shows $5k on line 14 for 2020 but enters $0 on line 2 for 2021. Is that exactly what happened?
Correct.
To my knowledge, you are the first to report this. Thanks for the information.


Thanks for the explanation, it makes me feel better and I will likely proceed in accepting TurboTax's $0 and move on with my life.
That is probably what I would do too.
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retiredjg
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Re: TurboTax complaining about traditional IRA basis

Post by retiredjg »

investlikebogle wrote: Mon Jan 17, 2022 4:04 pm I have exactly the same situation. I haven’t filled my forms yet.

I think TurboTax should automatically take prior remaining basis and put in on line 2 on form 8606. In line 1, you would have 2021 non deductible contributions of 6000.
This is what TT usually does (in normal situations) and it is what I would have expected. Apparently not, at least for this poster. :?

Not sure but if asks for remaining ira balance, enter 0.01 instead of zero and try again.
It does ask, but if the balance was $0 you can't really enter $0.01.

Some people have suggested not converting the entire IRA so that a balance actually does remain. I would expect this to carry the entire basis balance forward.
VanGar+Goyle
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Re: TurboTax complaining about traditional IRA basis

Post by VanGar+Goyle »

retiredjg wrote: Mon Jan 17, 2022 3:48 pm Was the 2020 Form 8606 done by TurboTax or by hand?

...

I suppose an alternate fix is to force the $5k number onto line 2 and see if it works.
How do you force a number into the Turbotax Form 8606 line 2?
I have a Form 5498 with a nondeductible rollover, but have not yet figured out how to get that basis into Turbotax.
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retiredjg
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Re: TurboTax complaining about traditional IRA basis

Post by retiredjg »

VanGar+Goyle wrote: Thu Mar 02, 2023 7:27 am
retiredjg wrote: Mon Jan 17, 2022 3:48 pm Was the 2020 Form 8606 done by TurboTax or by hand?

...

I suppose an alternate fix is to force the $5k number onto line 2 and see if it works.
How do you force a number into the Turbotax Form 8606 line 2?
I have a Form 5498 with a nondeductible rollover, but have not yet figured out how to get that basis into Turbotax.
Not sure I can help you with this, but will give it a try.

If you have a downloaded version of TT, you can pull up a form and type a number into the form. In other words, you can do your return by typing in numbers rather than answering the interview questions. It's like doing the return by hand, but typing instead of writing.

However, if you have a non-deductible rollover (presumably from one IRA to another IRA) shouldn't that basis already have been entered when the non-deductible contributions happened?
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